Download Evidence from Russian Border Regions

The Effect of the Border on Chinese Direct Investments:
Evidence from Russian Border Regions
Alina Novopashina
Abstract
This paper describes the effects of the border on Chinese direct investments to Russian border regions.
The findings of this paper show that Chinese direct investments to Russia gravitated to industries in the border
regions exporting their goods to China and to the production of non-tradable goods in non-border regions. The
net Chinese foreign direct investments (FDI) inflow to Russian border regions is very small but the development
of border trade led to informal investments between Russian and Chinese border regions. The case study of
Amur oblast suggests that informal Chinese investments go to the sectors associated with trade: logging (raw
timber primarily exported to China), construction of shopping malls, wholesale and retail. The results suggest
that the amount of informal Chinese investments significantly exceeds the amount of formal investments.
Introduction
Since opening Sino-Russian border crossings to private traders and travelers more than 20
years ago, economic interaction between Russia and China has increased tremendously. The
development of the relations between these two countries was encouraged by the central authorities
as well as authorities and entrepreneurs in the border regions. Following the opening of the border,
the development of Russian-Chinese relations was characterized by the prevalence of trade
cooperation over other forms of economic interaction. Furthermore, trade cooperation included not
only international trade, but also border trade (the term “small” border trade as opposed to “big”
international trade is more commonly used in China). As a result other types of economic interaction
arose between Russia and China. One was international capital flows, in the form of foreign direct
investments (FDI).
At the beginning of the 2000s the percentage of Russian border regions in the Chinese FDI
flows to Russia did not exceed 5% and the percentage of these regions in Russian-Chinese trade was
15%, three times higher than in FDI flows (Figure 1).1 However towards the end of the decade the
situation changed significantly: 32% of Chinese FDI in Russia and 12% of Russian-Chinese trade

Alina Novopashina is Junior Researcher at the Economic Research Institute (Khabarovsk), and Senior Lecturer
at Amur State University (Blagoveshensk). She can be contacted at: [email protected]. The research
for this paper was supported in part by the Russian Foundation for Basic Research grant No. 12-06-00134-а.
1
Henceforth the term “Russian border regions” refers to Russian regions that have a common land border with
China. There are six such regions: Altai Republic, Zabaikalskii Krai, Khabarovskii Krai, Primorskii Krai, Amur
oblast and Jewish Autonomous oblast.
37
Eurasia Border Review < Article >
was concentrated in the border regions.2
So, the share of border regions in the
total Chinese FDI to Russia increased
by more than six times in ten years. Is
this rapid increase in the share of
Russian border regions in Chinese FDI
flows evidence of a higher rate of the
investment cooperation development
between China and Russia? Does the
border affect Chinese FDI to Russian
regions?
There has been considerable
Figure 1: Russian Regions Bordering with China
research on the effects of the border on
location of the industrial production, international and border trade, cross-border migrations and
others.3 However, this research fails to discuss the effects of the border on FDI between neighboring
countries. Moreover, the theory of international capital flow does not consider the border or border
location of the countries or regions as a factor encouraging or restraining investments. Nevertheless,
the common land border is a sign of the space proximity of border countries or regions. Space
proximity of the countries or regions may encourage FDI, which result in the production of goods
being exported to the investment country.4 But there was no focus on informal economy and FDI.
Research suggests that the amount of Russian-Chinese border trade is underestimated
significantly. Thus, the case study of Amur oblast, the Russian region bordering with the
Heilongjiang province of China, suggests that at the beginning of the 2000s more than 90% of the
total value of import of this region from China were not recorded in official Russian statistics.5 This
is the result of the development of the informal economy in Russian and Chinese border regions.
Different cases concerning the effects of the informal economy on the development of countries and
regions were studied by Portes et al. (1989) (the case of developed and less developed countries),
Humphrey (1999) (provincial Russia), and Larin (2005) (the Russian Far East). 6 The case studies of
2
The author’s calculations were derived from data sets at the Unified Interdepartmental Information System:
http://www.fedstat.ru/indicators/start.do.
3
Krugman’s new economic geography was the inspiration behind this research (for more details see: Paul
Krugman, “Increasing Returns and Economic Geography,” The Journal of Political Economy, January 3:99
(1991): 483-499.
4
Elhanan Helpman, “A Simple Theory of International Trade with Multinational Corporations,” Journal of
Political Economy, 92:3 (1984); Elhanan Helpman and Paul Krugman, Market Structure and Foreign Trade
(Cambridge: MIT Press, 1985).
5
Nina Vragova and Iurii Rozhkov, Valiutnoe Regulirovanie Prigranichnoi Torgovli [Currency Regulation of
Border Trade] (Khabarovsk: KhGAEP Press 2005), 136-152.
6
Alejandro Portes, Manuel Castells, and Lauren Benton, eds., The Informal Economy: Studies in Advanced and
Less Developed Countries (Baltimore Md.: Johns Hopkins University Press, 1989); Caroline Humphrey,
“Traders, ‘Disorder,’ and Citizenship Regimes in Provincial Russia,” in Uncertain Transition: Ethnographies of
Change in the Post-socialist World, eds. Michael Burawoy and Katherine Verdery (Rowman & Littlefield, 1999),
38
Alina Novopashina
the informal economy in Russian and Chinese border regions, such as Holzlehner (2008) (the case of
Primorskii Krai of Russia and Heilongjiang province) and Ryzhova (2003, 2008) (the case of
Blagoveshchenk (Amur oblast) and Heihe (Heilongjiang province)), primarily discuss the effects of
the informal economy on trade, migration and other forms of international cooperation.7 However,
there has been no research focusing on the effects of the informal economy on FDI.
The remoteness of Russian border regions from the national capital market is the reason
behind the importance of using the advantages of the location and proximity to the border to develop
investment cooperation with China. The main question I want to ask in this research is does the
border affect Chinese FDI in Russia? To reveal the effects of the border on Chinese FDI in Russia I
test two hypothesizes. The first hypothesis is that Chinese FDI in the Russian border regions flow to
industries exporting their goods to China. This hypothesis applies only to formal FDI resulting from
Russia-China agreements, cooperation programs and joint projects. The second hypothesis is that the
informal economy in Russian border regions causes informal Chinese FDI.
This paper is divided into four sections. The first section provides the main theoretical
background of the effects of the border on FDI. The effects of border location on FDI flows from
Chinese to Russian regions are analyzed in the second section. The third and the fourth sections
describe the case concerning the investment cooperation between Amur oblast, a Russian border
region, and China: the third section describes the official (or formal) FDI flows from China to Amur
oblast and the fourth describes the informal Chinese FDI resulting from the development of border
trade.
FDI and Border Location
In this section I discuss the effects of the border location as a sign of the space proximity of
border countries or regions on FDI. The problem regarding the effects of the space on the flows of
FDI is one of the subjects of the new trade theory, which focuses on the general equilibrium model of
international trade on the assumption of increasing return to scale.8
There are two main approaches to explain incentives for FDI. The factor proportion
approach explains FDI in terms of differences between countries in relative factor endowment
19-45; Viktor Larin, Rossiisko-kitaiskie Otnosheniia v Regionalnykh Izmereniiakh (80-e gody XX nachalo XXI
veka) [The Russian-Chinese Relations in Regional Aspects (80 years in the XX - early XXI century)] (Moskva:
Vostok-Zapad, 2005), 390.
7
Tobias Holzlehner, Weaving Shuttles and Ginseng Roots: Commodity Flows and Migration in a Borderland of
the Russian Far East (Fairbanks: University of Alaska, 2008); Natalia Ryzhova, “Transgranichnyi Rynok v
Blagoveshchenske: Formirovanie Novoi Realnosti Delovymi Setiami chelnokov [Transbordering Market in
Blagoveshensk: Business Networks of Shuttle Traders Giving a Rise of the New Reality],” Ekonomicheskaia
Sotsiologiia 4/5 (2003); Natalia Ryzhova, “Informal Economy of Translocations: The Case of the Twin Cities of
Blagoveshensk-Heihe,” Inner Asia, 10:2 (2008): 323-351.
8
Paul Krugman, “Increasing Returns, Monopolistic Competition, and International Trade,” Journal of
International Economics, November, 9:4 (1979): 469–479; Paul Krugman, “Scale Economies, Product
Differentiation, and the Pattern of Trade,” The American Economic Review, December 70:5 (1980): 950-959.
39
Eurasia Border Review < Article >
accounting for cross-country differences in factor prices. 9 According to the factor proportion
approach FDI between countries arise if countries differ in factor endowment, and the level of trade
barriers and transport costs are low or zero. This approach associates incentives to FDI with the
ability of firms to exploit cross-country differences in factor prices by shifting production to the
cheapest locations. When countries differ in relative factor endowment, firms have incentives through
FDI for shifting some production stages to the cheapest locations. Foreign investors geographically
spread out the production process across countries in order to use a comparative advantage of the host
country. As a result, goods produced with these FDI should be exported to the investment country.
The proximity-concentration approach predicts that firms should expand across borders and
geographically separate the production across countries whenever the advantages of access to the
destination market and proximity to the customers outweigh the advantages from scale economies.10
The advantages of the proximity to the customers depend on transport costs and the level of trade and
investment barriers. Transport costs are directly related to the distance between trade countries or
regions. Firms are more likely to choose FDI over export when transport costs and trade barriers are
high and investment barriers are low. The advantages of production concentration depend on the size
of scale economies. If the economy of scale at the plant level is lower than at the corporate level,
overseas production prevails over export. According to the proximity-concentration approach the
terms for FDI are similar factor endowment and size of economy. As a result foreign investors have
an opportunity to gain access to the host country’s market and avoid high trade barriers. In these
terms, goods produced with these FDI are sold in the host country. Using the findings of the factor
proportion and proximity-concentration approaches, Markusen has developed a general equilibrium
model of international trade on the assumption of increasing return to scale.11
When trade costs (e.g., transport costs, trade barriers and others) are high, foreign investment
barriers are low, and countries are relatively similar in both relative factor endowment and the size of
their economies, the firms of these countries serve the foreign market through FDI induced by access
to the host country’s market. In these terms, FDI substitute for exports. When trade costs are low or
zero and countries are relatively similar in both relative factor endowment and size of economy there
are no incentives for these FDI. The reason for this is that countries have an opportunity to substitute
FDI for export because export is associated with lower production costs. When trade costs are low or
zero the size of the economy does not affect both FDI and export. If the level of trade barriers is high,
the export of these goods is associated with high costs. That is the reason for restraining FDI induced
by difference in relative endowment. This finding allowed us to suggest that these FDI create
9
Helpman, “A Simple Theory”; Helpman and Krugman, “Market Structure.”
Lael Brainard, “A Simple Theory of Multinational Corporations and Trade with a Trade-off between Proximity
and Concentration,” NBER Working paper № 4269 (1993); Lael Brainard, “An Empirical Assessment of the
Proximity-Concentration Trade-Off between Multinational Sales and Trade,” NBER Working paper № 4580
(1993).
11
James R. Markusen, Anthony J. Venables, Denise E. Konan, and Kevin H. Zhang, “A Unified Treatment of
Horizontal Direct Investment, Vertical Direct Investment, and the Pattern of Trade in Goods and Services,”
NBER Working paper № 5696 (1996); James R. Markusen, “Foreign Direct Investment and Trade,” CIES Policy
Discussion Paper № 0019 (2000).
10
40
Alina Novopashina
incentives for the development of international trade between home and host countries.
The effect of the border on FDI and FDI among border regions is not covered by the
discussed theories. But the results of these theories enable us to make some very important
observations about this subject.
Proceeding on the assumption that border regions are the closest located territories of the
host and foreign countries, trade between host and foreign border regions is more closely associated
with lower transport costs than trade between non-border host and foreign regions.12 Besides, the
trade regime between border regions is more liberalized than between non-border regions.
Consequently, when a border region is relatively better factor endowed than the investing country the
vertical FDI, which occurs when trade costs are low or zero, tend to concentrate in border regions.
Thus, if border regions are relatively better factor endowed than the investing country, these regions
are more attractive than non-border regions for FDI induced by differences in relative endowment. In
contrast non-border regions are more attractive than border regions for FDI induced by access to a
host country’s markets, which occurs when trade costs are high. In this case overseas production and
horizontal FDI substitute for export.
Chinese FDI in Russian Regions: Effects of the Border
China has a huge labor force, but lacks equipment and raw materials. So, the major part of
Chinese import is comprised of machinery and transport equipment, raw materials and mineral
products, chemical and related products. The percentage of these goods imported to China in 2010
was 79%, including 29% of raw materials.13
In the last few years the share of border regions in the net Chinese FDI inflow to Russia has
increased: in 2006 approximately 7% of the inflow went to the border regions, in 2011 the percentage
of these regions increased to 24%.14 These data show the growth of investment interaction between
Russian border regions and China.
According to the findings of the previous section of this paper, Russian border regions are
the most attractive Russian territories for Chinese FDI induced by differences in relative endowment
because trade costs and trade barriers in these regions are low. Consequently the assumption is that
Chinese FDI gravitates to industries in the Russian border regions producing relatively scarce goods
in China. Goods produced with Chinese FDI in Russian border regions are primarily exported to
China. Chinese FDI in import-competing industries and service sectors substantially gravitates to
12
According to the gravity approach, which is commonly used in empirical studies of factor proportion and
proximity-concentrations approaches, the transport costs depend on the distance between trading countries and
regions (see for example: Lael Brainard, “An Empirical Assessment of the Proximity-Concentration Trade-Off
between Multinational Sales and Trade,” The American Economic Review, September, 87:4 (1997): 520-544;
Francesca Di Mauro, “The Impact of Economic Integration on FDI and Exports: a Gravity Approach,” CEPS
Working Document, November (2000): 156).
13
See the National Bureau of Statistics of China.
14
The author’s calculations were made using data derived from the Unified Interdepartmental Information
System http://www.fedstat.ru/indicators/start.do.
41
Eurasia Border Review < Article >
non-border Russian regions. To test this hypothesis, indexes are used: the share of these regions in
total Chinese FDI to Russia and the FDI localization index.
The first index, the share of border regions in total Chinese FDI to Russia, is used to find the
position of these regions in Chinese FDI to Russia. This index is calculated for overall amount of
Chinese FDI and for separate industries (Appendix, Table A1). The high share of Chinese FDI
(approximately 50%) to Russian tradable goods production is concentrated in the border regions.
Among tradable goods, the highest share of border regions is Chinese FDI inflow to the primary
sector. These are such industries as agriculture, forestry, fishing and hunting, and mining and
quarrying. The high share of border regions in Chinese FDI in the agriculture sector is shown by the
high level of investments concentrated in forestry, especially in logging. Chinese FDI in
manufacturing mostly gravitates to non-border Russian regions.
The share of non-border regions is higher than the share of border regions in the net Chinese
FDI inflow to Russian non-tradable goods production. Only one-fifth of Chinese FDI in these
industries is concentrated in border regions. Among the non-tradable goods production the border
regions are the most attractive for Chinese FDI in financial and insurance activities. The development
of investment cooperation between Russia and China led to an increase in the share of Chinese FDI in
the border regions, especially in the accommodation, food service, transportation, communication,
and construction sectors. Through these FDI, Chinese investors have mainly developed the
infrastructure of these regions. In non-border regions, Chinese FDI is directed mostly toward the
expansion of retail spaces and real estate activities.
Thus the Sino-Russian border attracts Chinese FDI in goods production, such as raw
materials and timber, including the development of transport, financial, and touristic infrastructure in
Russian border regions.
The second index for FDI localization is used to reveal the most attractive industries for
Chinese direct investors in border and non-border Russian regions (Appendix, Table A2). The index
for FDI localization was calculated as follows:
I loc 
FDI mij FDI mi
:
,
FDI mj FDI m
where Iloc – index for FDI localization; FDImij – FDI from country m to industry i of region j;
FDImj – FDI from country m to region j; FDImi - FDI from country m to industry i of Russia; FDIm –
FDI from country m to Russia.
When the value of the index for FDI from country m to industry i of region j is greater than 1,
this industry accumulates more FDI from country m, than is appointed by the share of this regions in
total FDI from country m to Russia. Regarding Chinese FDI in Russia this means that industry i of
region j is the most attractive for Chinese foreign investors as compared with industries in other
Russian regions. To reveal differences between Chinese FDI and FDI from other countries, an index
for FDI localization was also calculated for non-Chinese FDI in border regions.
The highest values of the index for Chinese FDI localization in the Russian border regions
are in financial and insurance activities, forestry, construction, mining and quarrying, wholesale and
42
Alina Novopashina
retail trade, and manufacturing. The share of the border regions in the amount of Chinese FDI in
these industries is higher than is appointed by the share of border regions in the net Chinese FDI
inflow to Russia. The high value of the index in industries, which produce tradable goods, such as
forestry, mining and quarrying, and manufacturing, indicates that Chinese investors are interested in
the development of these industries in border regions. The low value of the index for Chinese FDI
localization in Russian non-border regions corroborates this finding.
The high value of index for FDI localization in the primary sectors of border regions can be
attributed not only to Chinese investments, but also to investments from other countries. The most
attractive industries in the border regions for foreign investors excluding China are forestry, mining
and quarrying. However, the value of index for Chinese FDI is higher than the FDI from other
countries. This suggests that Chinese investors are more interested than non-Chinese investors in the
development of these industries in the border regions. Besides, FDI from other countries in border
regions flow to transportation and communication, education, and real estate activities. Chinese firms
do not invest much in these industries found in border regions.
Chinese FDI in non-border regions is localized only in two industries: wholesale and retail
trade and real estate activities. Both of these industries produce non-tradable goods and services. So,
Chinese FDI in tradable goods production in Russia gravitates to border regions, but FDI in nontradable goods production generally concentrate in non-border regions. Investments in forestry and
mining and quarrying are concentrated in border regions. The high share of these industries’
productions such as raw timber and raw materials in Chinese imports, which is caused by a lack of
these goods in this country, suggests that border regions are more attractive than non-border regions
for vertical Chinese FDI. Chinese firms investing in forestry and mining and quarrying have an
opportunity to log timber and to extract raw materials in the border region. These firms then export
timber and raw material to China.
Thus Chinese FDI to Russian border regions flow to raw material production exporting their
goods to China. Chinese firms invest in Russian border regions primarily to take advantage of their
relative endowment in timber and mineral resources. In contrast, Chinese FDI to Russian non-border
regions flow to the production of final goods, which substitutes export to China. The main incentive
for Chinese FDI in Russian non-border regions is access to local markets. Non-border regions attract
significantly more Chinese FDI than border regions. As a result the amount of Chinese FDI induced
by the access to local markets is larger than the amount of Chinese FDI induced by the difference in
relative endowment. The prevalence of access to the local markets incentive over the difference in
relative endowment incentive for FDI is a worldwide trend.15
The inflow of Chinese FDI in tradable goods production in border regions is significantly
affected by Russian-Chinese major investment projects implemented in these regions. As a rule these
projects are the result of initiatives taken by central and local authorities, and they are part of different
programs of Russia-China cooperation. The examples of projects initiated by central and local
authorities with Chinese FDI are the construction of an electric line and power station in Amur oblast,
15
Markusen, “Foreign Direct Investment.”
43
Eurasia Border Review < Article >
the extraction of mineral products in Jewish Autonomous oblast, the development of logging and
timber processing in Jewish Autonomous oblast and in Zabaikalskii Krai. These projects are a part of
the program for cooperation between the Russian Far East and Eastern Siberia regions and the
northeastern region of China in 2009-2018 (Russia-China 2009-2018 Cooperation Program). 16
Consequently the inflow of Chinese FDI in these industries in border regions was substantially
comprised of FDI resulting from decisions made by the authorities. The amount of these investments
in Russian-Chinese relations is larger than the amount of FDI caused by small business initiatives. On
the one hand, this favors the development of those industries in border regions, which attract a large
amount of such investments. But on the other hand, the small amount of FDI caused by small
business initiatives suggests that the level of investment cooperation between Russian and Chinese
small firms is low. Small firms play a major role in social economic development, including
investment cooperation, in many countries.
The translocal informal economy has developed in cross-border cooperation between Russia
and China. It affects border trade, cross-border migrations, and the activities of mediators. 17 The
translocal informal economy is “a product of the social life of the frontier region and does not
conform to the vertical hierarchy of the modern organization of the Russian social system.”18 So it is
caused by the initiatives of businesses, not the authorities. How does the translocal informal economy
affect inward and outward FDI if it significantly affects Russian-Chinese border trade? Have the
initiatives of local entrepreneurs led to a rise in informal FDI between Russia and China? To answer
these questions the case of Amur oblast is examined in the next two sections of the paper.
Are Border Regions Attractive for Chinese Direct Investors? The Case of Amur Oblast
The reasons why the case of investment cooperation of Amur oblast with China is the
subject of study are as follows. Firstly, border trade liberalization in this region occurred earlier than
in other Russian border regions. The liberalization of border trade created incentives for the
development of the informal economy. The taking of these measures significantly affected the scale
of the informal economy. Secondly, the case of Amur oblast’s informal cross-border cooperation with
China is well studied, which provided the background to study informal FDI from China to Amur
oblast. But as of now, there has been no research on informal investment cooperation.
To make further comparison of formal and informal Chinese FDI, the formal Chinese FDI in
Amur oblast, which is accounted for in official statistics, is analyzed in this section. Since 2002 Amur
16
“Programma Sotrudnichestva Mezhdu Regionami Dalnego Vostoka i Vostochnoi Sibiri Rossiiskoi Federatsii i
Severo-Vostoka Kitaiskoi Narodnoi Respubliki (2009–2018) [Programme of Cooperation of the Far East and the
Northeast Siberia regions of the Russian Federation with the Northeast of People’s Republic of China (20092018)].” Accessed May 15, 2012. www.kp.ru/upfile/attached_file/559291.doc.
17
See for example: Ryzhova, “Informal Economy”; Ryzhova, “Transgranichnyi Rynok”; Tatiana Zhuravskaia,
“Serii Import na Rossiisko-kitaiskoi Granitse: Chto Novogo? [‘Gray’ Import on the Russian-Chinese border:
What’s New?],” Ekonomicheskaia sotsiologiia, 12:5 (2011).
18
Ryzhova, “Informal Economy.”
44
Alina Novopashina
Table 1. Chinese FDI Inflow by Industry in 2006-2011, % of Chinese FDI in Amur Oblast
Economic Activities
Logging
Construction
Wholesale and retail trade
Other industries
Year
2006
55.5
14.3
10.4
19.8
2007
91.4
0.1
0.3
8.3
2008
84.9
0.0
3.7
11.4
2009
28.7
65.4
0.0
5.9
2010
13.1
84.9
1.0
1.1
2011
7.6
88.6
0.0
3.8
Source: O Prigranichnom Sotrudnichestve Amurskoi Oblasti s Kitaem: Zapiska [About Cross-Border Cooperation between
Amur Oblast and China: Report] (Blagoveshchensk: Amurstat, 2010).
oblast and China have developed their investment cooperation. The net FDI inflow to Amur oblast
from China in 2002 was $336,000. This is five times larger than in 2000 (in 2001 Chinese firms
practically did not invest in Amur’s firms and the net FDI inflow was only $3,000). Before 2002
Chinese firms irregularly invested in Amur oblast and the net Chinese investments inflow to this
region was less than 60 thousand dollars a year. The inflow of Chinese FDI in Amur oblast increased
30 times by $10.1 million over an 8-year period from 2002 to 2010. Thus, the inflow of Chinese FDI
in Amur oblast in this period rose significantly.
The reason for the growth of Chinese FDI inflow to Amur oblast is the development of trade
between Amur oblast and China in the 2000s. Chinese FDI inflow by industry confirms this finding
(Table 1). The largest share of Chinese FDI is concentrated in construction (in this industry Chinese
FDI is generally concentrated in the construction of shopping malls) and logging. In 2006, FDI also
was concentrated in wholesale and retail trade.
The shares of different industries in Chinese FDI in Amur oblast enable us to make some
observations about the motives of Chinese investors. The highest share of FDI was in construction in
2009-2011 (from 65.4% to 88.6%). Almost the whole Chinese FDI in construction (up to 99.9% in
2009) went to the building of houses and shopping malls. The high share of Chinese FDI in building
shopping malls suggests that the main motive of Chinese firms investing in Amur oblast at that period
was access to the markets of this region. Shopping malls built using Chinese investments are taken by
Chinese retail traders selling mass-produced Chinese goods, which are usually informally imported to
Amur oblast. Thus, Chinese FDI in construction favors the growth of mass-produced goods,
including informal imports from China to Amur oblast.
Another motive for Chinese firms investing in Amur oblast is access to the timber of this
region. Thus Chinese FDI in logging promotes the export of Amur raw timber to China. Consequently,
the Chinese FDI inflow and international and border trade with China in Amur oblast are
interdependent forms of economic interaction. The development of border trade between Amur oblast
and China led to the growth of Chinese FDI in Amur oblast. Furthermore, Chinese FDI inflow favors
not only the strengthening of border trade but also the growth of international trade between Amur
oblast and China.
Since 2002 the net Chinese FDI in Amur oblast has significantly increased the growth of
FDI inflow, and is higher than the growth of trade between Amur oblast and China (Table 2). The
inflow of Chinese FDI increased 6.2 times by 2006 and 59.9 times by 2011, but the volume of trade
with China increased 3.3 times by 2006 and only 8.8 by 2011. In 2003-2011 Chinese investments did
45
Eurasia Border Review < Article >
Table 2. The Role of China in the Net FDI Inflow and International Trade of Amur Oblast in
2003-2011
Index
Growth of Chinese FDI inflow, times comparing 2002
Growth of the volume of trade with China, times
comparing 2002
Share of China in net FDI inflow, in %
Share of China in international trade, in %
2003
1.3
2006
6.2
2007
8.6
Year
2008
14.1
2009
21.7
2010
30.2
2011
59.9
1.1
3.3
5.3
7.6
4.5
5.5
8.8
2.8
74.2
1.9
81.7
2.3
76.8
4.1
75.9
3.5
77.9
4.8
83.3
4.7
87.0
Source: Amurskaia Oblast’ v Tsyfrakh: Kratkii Statisticheskii Sbornik [Amur Oblast in Figures: Statistics Digest]
(Blagoveshchensk:
Amurstat,
2011),
365-366;
Unified
Interdepartmental
Information
System
http://www.fedstat.ru/indicators/start.do.
not exceed 5% of the total FDI in Amur oblast, but China’s share in international trade was about 7585%.
An agreement between the Central Bank of Russia and the People's Bank of China, which
set the beginning of the experiment in interbank transfers for trade operations in the border territories
of Blagoveshchensk (Amur oblast) and Heihe (Heilonjang province) using the national currencies of
Russia and China (i.e., rubles and the yuan) was signed on August 22, 2002 (The agreement of
August 22, 2002).19 This agreement provided strong incentives for the development of border trade
between Russia and China. The agreement was extended for all other border territories of Russia and
China on August 24, 2004. Researchers suggest that the development of the correspondent
relationship between banks in Amur oblast and Heilongjiang province enabled the two regions to
quantify the volume of border trade, which is not recorded in Russia’s official statistics whereas it is
recorded in China’s statistics.20
According to our findings, trade between China and Amur oblast significantly affects the
inflow of Chinese FDI. Is it possible that the informal trade led to informal investments when FDI
and trade flows from China were interdependent? Could the correspondent accounts in banks located
in the border territories of Amur oblast and Heilongjiang province be used for informal investments?
Informal Chinese FDI in Amur Oblast
In the forth section I test the second hypothesis that the informal economy in the Russian
border regions leads to informal Chinese FDI. To test this hypothesis in the first part of this section I
discuss how the inflow of informal Chinese FDI in Amur oblast was explored. The reasons behind the
inflow of informal FDI in Amur oblast are described in the second part, while an evaluation of
informal Chinese FDI in Amur oblast was done in the third part.
First, I would like to define the term informal FDI. Portes et al. (1989) suggest that the
19
Before the signing of the agreement of August 22, 2002, the US dollar was the only currency used in interbank
transfers between Russia and China.
20
See: Natalia Simutina and Natalia Ryzhova, “Ekonomicheskie i Sotsialnye Vzaimodeistviia na
Transgranichnom Prostranstve Blagoveshchensk–Heihe [Economic and Social Interactions on Transboder
Territories of Blagoveshchensk-Heihe],” Vestnik DVO RAN, 5 (2007): 130-144.
46
Alina Novopashina
informal economy is “a process of income generation characterized by one central feature: it is
unregulated by the institutions of society, in a legal and social environment in which similar activities
are regulated.” 21 Thus, informal FDI are directly related to the production of goods by foreign
companies, which is unregulated by law and legal institutions. Informal investments are neither
illegal nor do Russian banks consider them as foreign investments. For example, they can be recorded
in a bank’s statistics as transfers made by persons or companies; or when a foreign investor buys
equipment for a foreign invested enterprise it can be recorded as an export.
First, let’s take a closer look at the inflow of informal Chinese FDI in Amur oblast. The
findings of the studies on informal trade and the interbank relationship between Amur oblast and
Heilongjiang province enable us to suggest three methods of informal investing by Chinese firms and
entrepreneurs in Amur oblast:
(1) “Export” investments. These investments directed at Amur oblast through Amur
commercial banks' correspondent accounts in Chinese banks are payments for the export of goods to
China. According to customs statistics, “export” investments are the difference of Chinese payments
for export through Amur commercial banks' correspondent accounts in Chinese banks and the volume
of exports from Amur oblast to China. Previous research based on the comparison of Amur banks’
and customs statistics did not confirm the existence of “export” investments from Chinese firms to
Amur oblast.22
(2) “Import” investments occur when the total amount of official (or formal) and informal
imports exceed the amount of payments to China through Chinese commercial banks' correspondent
accounts in Amur banks. In this case only a part of the income of Chinese firms and entrepreneurs
transfers to China. The other part of this income from imports is invested in fixed capital of foreign
invested enterprises in Amur oblast by Chinese firms and entrepreneurs. “Import” investments are the
difference of the total volume of official (or formal) and informal imports from China to Amur oblast
and payments to China through Chinese commercial banks' correspondent accounts in Amur banks.
Previous research suggests that the amount of “import” investments was about $125 million
in 2006. It was 60 times higher than the official Chinese FDI in Amur oblast in that period.23 The
occurrence of “import” and “export” investments between Amur oblast and China resulted from the
signing of an agreement on August 22, 2002.
(3) Cash assets import and export or “cash” investments. Unlike “import” and “export”
investments, the occurrence of this type of investment was not attributed to the agreement of August
22, 2002. “Cash” investments result from the peculiarities of the social and economic cooperation
between Russian and Chinese border territories. As a rule participants of such cooperation are small
firms and entrepreneurs. The transactions between these firms are made at a “low level,” without
21
Portes et al., “The Informal Economy,” 12.
Nina Vragova and Natalia Simutina, “Mezhbankovskie Raschety kak Factor Tsivilizovannogo Razvitiia
Vneshnetorgovykh Otnoshenii Prigranichnykh Regionov Rossii i Kitaia [Interbank Payments as a Factor of
Civilized Development of the Foreign Trade Relations of Cross-border Regions of Russia and China],” Dengi i
Kredit, 2 (2007): 56-62.
23
Simutina and Ryzhova, “Ekonomicheskie i Sotsialnye Vzaimodeistviia.”
22
47
Eurasia Border Review < Article >
using bank services or other organizations. Often small firms and entrepreneurs in the border
territories of Russia set up close relationships with such firms and entrepreneurs in China. The setting
up of close relationships is the result of long-term trade cooperation. Furthermore, the turnover of
small firms and entrepreneurs and the volume of transactions are also small. That is why they prefer
cash transactions to bank transfers. Previously, the amount of “cash” investments has not been
quantified.
Now I would like to describe the reasons behind informal Chinese FDI inflow to Amur
oblast. To understand informal investments more fully, I analyzed the characteristics of the
enterprises in Amur oblast that China invested in, the differences of starting and doing business by
Russians and foreign investors, and legislative restrictions for foreign invested enterprises. The
reasons behind informal Chinese FDI in Amur oblast are as follows:
(1) Characteristics of enterprises in Amur oblast. China invested enterprises in Amur oblast
generally are small or medium-sized firms.24 The turnover of these firms is not large: the turnover of
China invested enterprises ranges from 50 million rubles (or $1.7 million) per year for logging firms
to 300 million rubles (or $10 million) per year for wholesale enterprises. Consequently the amount of
investments to these enterprises is not large either. For these firms, informal investments provide a
quicker and easier way to invest their capital.
(2) Russian legislative restrictions for foreign invested enterprises. According to Russian
legislation, only two types of business organizations are allowed for foreign invested enterprises.
These are limited liability companies (LLC) and joint-stock companies, which are judicial persons.25
However, Chinese firms in Amur oblast invest not only in LLC and joint-stock companies, but also in
entrepreneurs. According to Russian legislation, entrepreneurs are not judicial persons, and Russian
laws do not regulate FDI to entrepreneurs. Consequently Chinese investments to entrepreneurs in
Amur oblast are informal.
(3) The complicated Russian legal system. Procedures to set up foreign invested enterprises
do not significantly differ from the procedures to set up national enterprises.26 However, Chinese
investors, usually small firms or entrepreneurs, establishing a foreign invested enterprise in Amur
oblast, often do not know well Russian legislative peculiarities regulating the starting and doing
24
According to the author’s calculations, businesses in Amur oblast attract Chinese investments, which are
related to logging, construction, wholesale and retail trade, and are small or medium-sized firms.
25
In Russian legislation foreign direct investment is an acquisition by a foreign investor of not less than 10% of
a share in the authorized (reserve) capital of a commercial organization; an investment to the fixed assets of a
foreign legal entity subsidiary founded in the territory of the Russian Federation; financial lease (leasing) of the
equipment with the customs value of not less than one million rubles carried out by a foreign investor acting as a
leaser (The Federal Law “On Foreign Investment in the Russian Federation” established in 1999).
26
In Russia the procedures to set up foreign invested enterprises are regulated by the same law that covers
procedures to set up national enterprises (The Federal Law “On Government Registration of the Legal Persons
and Individuals Entrepreneurs”). However, the procedures to set up foreign invested enterprises include the
requirement to submit for the registration more documents than national enterprises, and to translate all
necessary documents to Russian.
48
Alina Novopashina
business by foreign invested enterprises.27 That is why some of these firms or entrepreneurs employ a
Russian person who knows these peculiarities and can register an enterprise. When the firm is a
small-scale enterprise, benefits of foreign invested enterprises in Russia compared with Russian
enterprises do not play a significant role. To avoid formalities this firm may be registered as a
Russian enterprise, but the fixed capital is formed by a Chinese firm or entrepreneur. Consequently
the investments in fixed capital of these firms are not recorded as Chinese FDI. They are considered
informal investments.
(4) Export and migration barriers. As I described above the major part of Chinese FDI in
Amur oblast is concentrated in logging, construction, wholesale and retail. The activities of foreign
invested enterprises in these industries are significantly affected by legislative restrictions.
The motive for China invested enterprises in the logging of Amur oblast is gaining access to
timber for export to China. About 80% of the timber export from Amur oblast to China is raw
timber.28 In 2010, the total amount of raw timber produced in this region was 773.4 thousand cubic
meters, and 773.2 thousand cubic meters were exported to China.29
Since 2007, Russian tariff policy has aimed at increasing the duty rate for exporting timber
and the liberalization of processed timber export. The aim of this policy is the creation of incentives
for timber processing in Russia and for processed timber import. Chinese FDI in the logging of Amur
oblast are induced by the difference in relative endowment. The growth of trade barriers leads to an
increase in these FDI. The export duties hike on raw timber resulted in a decrease of Chinese FDI in
logging by 40% and in a decrease of raw timber export to China by more than 50% in 2009 compared
to 2008. 30 Nevertheless statistics show that the redaction of logging was less than 30% in 2009
compared to 2008. Besides, at that period domestic consumption and export to other countries and
regions of raw timber did not increase.31 One possible reason is that China invested enterprises in the
logging of Amur oblast export timber informally or even illegally. This export is not accounted for in
customs statistics. Ryzhova (2008) discussed the informal and illegal schemes of timber export from
Amur oblast to China, such as presenting double and triple mediation agreements for export, buying
and selling illegal wood and timber several times to be legalized through legal contracts, sending
higher than officially documented volumes of wood and other materials.32 Furthermore, both Russians
and Chinese firms illegally cut down trees.33 This illegally logged timber is also exported to China
27
Aleksandr Gorbatov, “Puti Kitaiskogo Biznesa v Rossii [Development Options of Chinese Business in
Russia],” RASPP, July 27, 2012. Accessed July 30, 2012. http://www.raspp.ru/novosti/eurasia-news/puti_
kitajskogo_biznesa_v_rossii/.
28
According to the custom statistics of Amur oblast.
29
According to data from the Unified Interdepartmental Information System, http://www.fedstat.ru/indicators/
start.do; and custom statistics of Amur oblast.
30
In 2009 the customs duty for raw timber sharply increased. The customs duty for some types of timber
increased from 24 euro per one cubic meter to 100 euro per one cubic meter.
31
Amur Statistic Yearbook 2010.
32
Ryzhova, “Informal Economy.”
33
“Zolotoi les” [Golden forest] Amur.info, May 13, 2004. Accessed May 16, 2012 http://www.amur.info/news/
2004/05/13/1.html; “Kitaiskaia Kompaniia na Severe Priamuria Nezakonno Vyrubila 70 Gektarov Lesa [Chinese
49
Eurasia Border Review < Article >
using informal or illegal schemes.
The decrease of formal Chinese FDI in logging and formal export of raw timber and the
increase of informal export of raw timber to China are the possible reasons behind informal Chinese
investments in the logging of Amur oblast. Besides, when the level of trade barriers for raw timber
export is high, the share of informal investments in the net Chinese FDI inflow to logging in Amur
oblast is also high.
The barriers for doing business in construction and wholesale and retail trade are determined
by the restrictions imposed by Russian immigration legislation. In Russia, immigration quotas are
determined annually, so firms hiring foreigners have to obtain immigration and work permits for each
of them.34 Often authorities refuse permission to these firms. These laws are used only for lowskilled workers who are a major part of the workforce in China invested enterprises, such as
construction, wholesale and retail trade in Amur oblast. This leads to immigration legislation
infractions by these firms. The questionable legal activity of these firms causes informal investments
from Chinese co-owners.
Finally, I would like to evaluate informal Chinese FDI in Amur oblast. The evaluation of
informal Chinese investments enables us to recognize investments from the net Chinese FDI inflow
to Amur oblast. This allows us to estimate the scale of border investment cooperation between Amur
oblast and Heilongjiang province.
Using customs statistics, the evaluation of “export” investments is based on the comparison
of payments from China through correspondent accounts with the volume of exports from Amur
oblast to China. The data suggest that the volume of exports exceeded the amount of payments from
China in 2000-2006 except in 2002 (Table 3).
The possible reasons for this are as follows:
Firstly, the excess of exports over payments might have resulted from capital flight from
Table 3. Chinese “Export” Investments Inflow to Amur Oblast in 2000-2006, in million US
dollars*
Index
(1) Payments from China
(2) Export to China
(3) “Export” investments (3) = (1) – (2)
2000
30.4
47.0
-16.6
2001
25.2
47.3
-22.1
2002
64.8
49.0
15.8
Year
2003
48.5
51.4
-2.9
2004
53.1
72
-18.9
2005
54.6
135.3
-80.7
2006
36.2
101.2
-65.0
Source: The author’s calculations were made using data derived from Nina Vragova and Natalia Simutina, “Mezhbankovskie
Raschety kak Factor Tsivilizovanogo Razvitiia Vneshnetorgovykh Otnoshenii Prigranichnykh Regionov Rossii i
Kitaia [Interbank Payments as the Factor of Civilized Development of the Foreign Trade Relations of Cross-border
Regions of Russia and China],” Dengi i Kredit, 2:60 (2007); Custom statistics of Amur oblast.
* The evaluation of informal Chinese investments was done until 2006, so data on interbank transfers between Amur oblast
and China are not available between 2007-2011.
Firm Illegally Cuts Down 70 Hectares of Wood in the North of Priamure.],” Amur.info, March 28, 2007.
Accessed May 16, 2012. http://www.amur.info/news/2007/03/28/21.html; “Za Kontrabandu Lesa Amurchanina
Oshtrafovali na 200 Tysiach Rublei [For Wood Contraband Amurchanin Fined 200 Thousand Rubles],”
Amur.info, May 13, 2008. Accessed May 16, 2012. http://www.amur.info/news/2008/05/13/4.html.
34
According to Federal Law “On Legal Status of Foreigners in the Russian Federation,” established in 2002. 50
Alina Novopashina
Russia. Russian firms exporting their goods to China might not transfer payments for export to
Russia. The comparison of real interest rates in Russia and China shows that in 2000-2006 the
average real interest rate of deposits in Russia was -8.89% while in China it was 1.03%.35 Negative
real interest rates in Russia and positive real interest rates in China are one of the possible reasons for
the capital flight from Russia. Another reason was the high inflation rate in Russia. In 2000-2006 the
average inflation rate in Russia was 15.0% while in China it was only 1.2%. In order to avoid
devaluation of export receipts Russian exporters did not return it to Russia.
Secondly, a major portion of the exports from Amur oblast to China in that period was raw
timber. This timber was exported by China invested enterprises. Some of these enterprises received
their investment gain in the form of produced goods, particularly in the form of raw timber. Thus
there were no payments for this exported raw timber.
Thirdly, the volume of export to China according to customs statistics included not only the
export of enterprises working in Amur oblast but also the export of enterprises working in other
Russian regions through the customs of Amur oblast. But the data from payment statistics included
payments from China for only the export of enterprises working in Amur oblast.
To evaluate “import” investments the value of informal imports from China to Amur oblast
was estimated.36 To evaluate the volume of informal import from China to Amur oblast I used a
method utilized by the Central Bank of Russia. This method is based on the comparison of retail
commodity turnover in the region with import goods from other Russian regions and from other
countries and domestic production:
II  RT  OI  RI  DP,
where II – informal import of the region; RT - retail commodity turnover of the region; OI –
official import of the region from other countries; RI – trade of the region with other Russian regions;
DP – domestic production consumed in the domestic market of the region.
My evaluation shows that in 2000-2006 informal investments increased by 2.5 times from
$287.4 million in 2000 to $710.4 million in 2006 (Table 4). Besides, from 84% to 95% of Chinese
imports to Amur oblast were informal.
The difference of official and informal imports from China and payments to China through
interbank correspondent accounts at the beginning of the 2000s was not “import” investments (Table
4). In that period, despite the increase in correspondent accounts, cash was primarily used in
transactions between Amur oblast and China. Since 2002 the evaluation of “import” investments has
been correct. In that period, interbank relationships between the border territories of Amur oblast and
Heilongjiang province started to develop.
35
The author’s calculations were made using data derived from the Unified Interdepartmental Information
System http://www.fedstat.ru/indicators/start.do; National Bureau of Statistics of China http://www.stats.gov.cn;
World Development Indicators & Global Development Finance http://data.worldbank.org/.
36
“Metodicheskie Printsipy Otsenki Otdelnykh Statei Platezhnogo Balansa [Methodological Basis of Balance of
Payment Sheet Accounts Evaluation],” Central Bank of Russia. Accessed April 21, 2012 www.cbr.ru/statistics
/credit_statistics/principle.pdf.
51
Eurasia Border Review < Article >
Table 4. Chinese “Import” Investments Inflow to Amur Oblast in 2000-2006, in million US
dollars
Index
(1) Official import from China
(2) Informal import from China (2)
= (2.1) – (2.2) – (2.3) – (2.4)
(2.1) Retail turnover
(2.2) Import from other countries
(2.3) Trade with other regions
(2.4) Domestic production consumed on
domestic market
(3) Payments to China
(4) “Import” investments (4) = (1) + (2) – (3)
2000
12.3
2001
16.5
2002
21.5
Year
2003
27.7
2004
44.1
2005
86.7
2006
131.3
287.2
304.4
318.3
383.8
508.7
520.6
710.4
406.0
16.6
12.8
450.0
21.8
15.8
491.3
24.3
16.0
618.9
36.8
18.8
850.1
61.7
24.7
989.6
114.3
38.1
1330.9
146.1
35.2
89.3
108.0
132.6
179.5
255.0
316.7
439.2
2.7
296.8
14.3
306.6
140.9
198.9
206.7
204.8
309.0
243.8
381.8
225.5
589.1
252.6
Source: The author’s calculations were made using data derived from Nina Vragova, and Natalia Simutina “Mezhbankovskie
Raschety kak Factor Tsivilizovannogo Razvitiia Vneshnetorgovykh Otnoshenii Prigranichnykh Regionov Rossii i
Kitaia [Interbank Payments as the Factor of Civilized Development of the Foreign Trade Relations of Cross-border
Regions of Russia and China] Dengi i Kredit, 2:60 (2007);” Custom statistics of Amur oblast; Unified
Interdepartmental Information System http://www.fedstat.ru/indicators/start.do.
Evaluated informal investments went from 1.5 to 41.0 times higher than the official FDI
from all countries and went from 94.6 to 3897.8 times higher than the official Chinese FDI in Amur
oblast in 2002-2006 (Table 5). However, the difference of the amount of informal and official
investments declined in that period. The reason for it is that the activities of the mediators
significantly increased in that period. As a result the growth rates of official trade between Amur
oblast and China were higher compared with the growth rates of informal trade. These led to lower
growth rates of “import” investments in contrast with the growth rates of official Chinese FDI.
The problem with this research method, which is used for evaluating informal investments,
is determining the payments from China for export from Russia and payments to China for import to
Russia. Concerning payments from and to China, data should include all international and border
trade transactions between Amur oblast and Heilongjiang province in order to adequately evaluate
“export” and “import” investments. But according to Vragova and Simutina, payments through
interbank correspondent accounts represented 75% of international and border trade profit
Table 5. Ratio of Informal Investments from China to Official FDI from China and from All
Countries to Amur Oblast in 2002-2006
Index
(1) Informal investments (“Export” investments +
“Import” investments), in million of US dollars
(2) Official FDI from China, million US dollars
(3) Ratio (3) = (1)/(2)
(4) Official FDI from all countries, million US dollars
(5) Ratio (5) = (1)/(4)
2002
2003
Year
2004
2005
2006
214.7
201.9
224.9
144.8
187.6
0.34
639.0
5.2
41.0
0.05
3897.8
15.7
12.9
0.52
433.6
42.6
5.3
1.53
94.6
95.3
1.5
0.93
202.6
110.9
1.7
Source: Author’s calculation using the data from Table 3, 4 and the Unified Interdepartmental Information System
http://www.fedstat.ru/indicators/start.do.
Note: Data from 2000-2001 are not shown in Table 5, because interbank relationships between border territories of Amur
oblast and Heilongjiang province, which allowed for the evaluation of informal Chinese investments, had started to
develop only since 2002.
52
Alina Novopashina
repatriation in 2006 and only 29% of it in 2002.37 As a consequence, “payments from China” in Table
3 and “payments to China” in Table 4 are underestimated, which leads to the underestimation of
“export” investments and the overestimation of “import” investments. If the percentage of
international and border trade profits paid through interbank correspondent accounts suggested by
Vragova and Simutina is right, it means that “export” investments to Amur oblast were $174.4
million in 2002 (as opposed to the $15.8 million estimated in Table 3). Besides, there was an outflow
of $146.1 million of “import” investments from Amur oblast in 2002 (as opposed to the inflow of
$198.8 million of “import” investments estimated in Table 4). These estimations show that the main
source of informal investments to Amur oblast in 2002 was payments from China. The same
estimations for 2006 show that “export” investments were -$52.9 million (as opposed to the -$65.0
million in Table 3) and “import” investments were $56.2 million (as opposed to the $252.6 million in
Table 4). A re-estimation of payments from and to China through interbank correspondent accounts
resulted in a reduction of informal investments, but this does not discount the hypotheses about
informal investments from China to Amur oblast. So, in 2002 informal investments in Amur oblast
were $28.4 million, and in 2006 they were $3.3 million.
Vragova and Simutina also wrote that only $70.7 million was paid through correspondent
accounts as payments for imports from China in 2006, which represented 54% of the official imports
in Amur oblast.38 As a result, a residual 46% of official imports were not paid for through interbank
correspondent accounts. These data also confirm that payments to China are significantly
underestimated and the real informal investments to Amur oblast might be larger. The evaluated
amount of informal investments does not include “cash” investments, which are difficult to evaluate.
Consequently, informal investment to Amur oblast might be bigger as well as smaller than estimated.
Further liberalization of trade between the Russian and Chinese border regions led to the
elimination of the requirement to open accounts in designated banks for interbank transfers. In 2011,
the residents of Russia and China acquired the right to do interbank transfers in freely convertible
currencies (e.g., rubles and yuans) without opening accounts. Interbank transfers, without the need to
open accounts, complicate the evaluation of informal investments.
Conclusion
The theory of international capital flow does not consider the border or border location of the
countries or regions as a factor encouraging or restraining FDI. However, as the case of the SinoRussia border suggests, the border matters for Chinese FDI to Russia. The border is not a barrier. The
common land border is viewed as a sign of the space proximity of the neighboring Russian and
Chinese border regions.
Firstly, the Sino-Russia border increases Chinese FDI to Russian industries in border regions
exporting their goods to China. As a result, Chinese FDI in border regions create incentives for the
37
38
Vragova and Simutina, “Mezhbankovskie Raschety,” 60.
Ibid.
53
Eurasia Border Review < Article >
development of trade between Russian border regions and China. Consequently, this leads to the
growth of interaction and integration between these regions. Chinese FDI in non-border Russian
regions is concentrated in the production of non-tradable goods. Consequently, Chinese FDI restrain
exports in non-border Russian regions.
Secondly, the border affects not only formal investments but also encourages informal
Chinese FDI. The translocal informal economy is developed in cross-border cooperation between
Russia and China. It affects border trade, cross-border migration, and the activity of mediators. This
enables us to assume that the translocal informal economy also affects Chinese FDI in Russia’s
border regions.
The case study of Amur oblast, which has a common land border with China, confirmed this
assumption. The development of informal trade and border trade liberalization led to the emergence
of informal Chinese investments in this region. The reasons behind China’s informal investments are
due to the characteristics of Chinese invested enterprises in Amur oblast (usually these are small or
medium-sized firms); legislative restrictions; and difficult procedures for Chinese investors to set up
foreign invested enterprises. Using official statistics, my evaluation of informal investments suggests
that the net inflow of these investments exceeds the net formal Chinese FDI inflow to Amur oblast.
Appendix
Table A1. The Share of Border Regions in the Net Chinese FDI Inflow to Different Industries
of Russia, in %
Economic Activities
2006
6.7
42.9
99.5
100.0
14.5
10.3
3.5
21.0
44.5
0.0
7.9
100.0
1.8
Total
Tradable goods:
Agriculture, forestry, fishing and hunting
Forestry
Mining and quarrying
Manufacturing
Nontradable goods:
Construction
Wholesale and retail trade
Transportation and communication
Accommodation and food service activities
Financial and insurance activities
Real estate activities
Year
2008
15.0
43.6
88.8
89.6
32.4
10.1
9.2
0.4
4.1
55.2
97.0
100.0
2.6
2011
24.2
48.7
99.1
100.0
98.1
31.5
20.9
53.9
13.7
54.8
96.2
100.0
0.7
Source: The author’s calculations were made using data derived from the Unified Interdepartmental Information System
http://www.fedstat.ru/indicators/start.do.
Note: According to the Standard Industrial Classification (SIC) of the United Nations tradable goods include agriculture,
forestry, fishing and hunting, mining and quarrying, manufacturing. The production of all others industries is non
tradable.
Value 100.0 means that the net Chinese FDI inflow to industries concentrated in Russian border regions; value 0.0
means that the net Chinese FDI inflow to industries concentrated in Russian non-border regions.
The industries, in which Chinese firms did not invest (e.g., electricity; gas and water supply; education; public
administration and defence, compulsory social security), and industries, in which the share of Chinese FDI were less
than 0.1% or equal to zero (e.g., human health and social work activities; other public and personal service activities),
were excluded.
54
Alina Novopashina
Table A2. Index for Chinese FDI Localization in Russian Border and Non-Border Regions, and
Index for Non-Chinese FDI Localization in Russian Border Regions (value in 2006,
2008, 2011)
Economic Activities
Agriculture, forestry,
fishing and hunting
Forestry
Mining and quarrying
Manufacturing
Construction
Wholesale and retail
trade
Transportation and
communication
Financial and insurance
activities
Real estate activities
Education
Other public and personal
service activities
Chinese FDI in border
regions
2006
2008
2011
Chinese FDI in nonborder regions
2006
2008
2011
non-Chinese FDI in
border regions
2006
2008
2011
14.9
5.9
4.1
-
0.1
-
0.8
1.5
0.6
15.0
2.2
1.5
3.1
6.0
2.2
0.7
-
4.1
4.1
1.3
2.2
0.9
1.0
0.8
0.1
0.8
1.1
1.2
0.9
0.6
4.1
2.7
0.1
-
2.5
0.9
-
2.8
1.2
0.3
1.3
6.7
0.3
0.6
0.6
1.1
1.1
-
-
-
-
3.7
2.3
1.1
0.5
0.6
1.4
15.4
3.6
15.0
6.7
4.1
-
-
-
-
-
-
0.3
-
0.2
-
-
1.1
-
1.1
-
1.3
-
0.1
-
0.3
-
2.4
19.5
-
-
-
1.1
-
-
-
-
-
Source: Author’s calculation using data derived from the Unified Interdepartmental Information System
http://www.fedstat.ru/indicators/start.do.
55